Don't pin gas prices on corn and ethanol

True, the cost of producing ethanol has been driven up for a number of reasons, including a higher cost of corn, but there are other factors that have a bigger effect on the price consumers see at the gasoline pump.
The price of crude oil is affected by uncertainty over global economic growth and how that impacts oil demand and the value of the dollar.

Robert Burns, Texas AgriLife | Nov 09, 2011

Feeling pain again at the gasoline pump? Don't blame it on corn and the cost of ethanol.

Well, at least don't blame it entirely on corn, said Dr. Mark Welch, Texas AgriLife Extension Service grains marketing economist in College Station.

True, the cost of producing ethanol[2] has been driven up for a number of reasons, including a higher cost of corn, but there are other factors that have a bigger effect on the price consumers see at the gasoline pump, Welch said.

"Certainly ethanol is a contributing factor; the markets are linked, obviously,"

Welch said. "But to drive the price of crude oil[3], there are so many other things going on, such as uncertainty over global economic growth and that impact on oil demand and the value of the dollar. In the case of ethanol, that we're only blending 10 percent gives you some idea of the magnitude of the change."

There's no argument that corn prices are relatively high and the failure of a large amount of the Texas crop was a factor, he said. On an average year, Texas farmers harvest about 200 million bushels, but current crop projections are about half of that. And though not affected by drought, as the Texas crop was, Corn Belt yields this year were "disappointing."

"We still don't have a firm handle on what the crop size nationwide is going to be. But we do know that the ending stocks are going to remain very, very tight in the corn market," Welch said. "Tight supplies put an upward pressure on corn prices, which is putting a squeeze on the profit margins of ethanol producers."

If ethanol margins are tight, then there is not an incentive to increase ethanol production, which will keep production down and prices relatively high, he said.

Welch noted that it was understandable why some may look to ethanol markets as the culprit for higher gasoline prices. Crude prices have been very stable over the last few weeks, while ethanol markets have been stronger in the last few weeks.

"Ethanol markets[4] and crude oil markets do not necessarily move in tandem," he said. “Though linked, they do have particular supply and demand dynamics.

"I personally would not attribute what is happening to the price of gasoline today to what is happening in the ethanol market. All of these markets, energy and grains, have high degrees of volatility separately, too much so to blame price action in one simply on the other. There are too many other factors going on."